Automated Clearing House (ACH) payments are a type of electronic bank-to-bank payment system in the US. Unlike payments facilitated by card networks like Visa or Mastercard, ACH payments are managed by a body called the National Automated Clearing House Association (NACHA).
In Q3 of 2023, the total volume of payouts on ACH networks reached 7.8 billion. This was 3% higher than the volume from the same quarter in the previous year. Clearly, ACH transactions are one of the fastest-growing modes of electronic payments in the world.
This also signifies the growing importance of ACH payment facilitators in the digital payments landscape. In this article, we’ll discuss everything you need to know about the ACH payment facilitator model and how SaaS companies can go about facilitating ACH payments easily.
Let’s get started.
TL;DR
- A payment facilitator (PayFac) is essentially a SaaS vendor or software provider that enables its users (businesses) to accept online payments from their customers through the platform itself. An ACH payment facilitator, therefore, is simply a PayFac that allows users to accept payments through an electronic bank-to-bank network.
- ACH transactions are one of the fastest-growing modes of electronic payments in the world due to the convenience they offer, low processing costs, and enhanced security. This makes ACH PayFacs a desirable option for small businesses or start-ups.
- The great thing about an ACH PayFac solution like Stax Connect is that SaaS companies or ISVs can embed ACH payments in their software easily and own (also, white label) the payment experience. All this without having to invest time and resources in partnering with an acquiring bank or building an elaborate payment infrastructure.
Understanding ACH Payment Facilitators
A payment facilitator (PayFac) is essentially a SaaS vendor or software provider that enables its users (businesses) to accept online payments from their customers through the software platform itself. As such, an ACH payment facilitator is simply a PayFac that allows users to accept payments through an electronic bank-to-bank network.
PayFacs typically partner with a payment processor or a bank to provide merchant services. This enables business owners to accept payments directly through their SaaS platform without needing a Merchant ID (MID)—as is the case with traditional merchant account providers. Instead, the PayFac uses its master merchant account to facilitate payments for its sub-merchant accounts.
Instead of going through a third-party payment gateway, your ACH PayFac will allow the use of its own platform to process your payments. This is pretty much similar to the service that PayPal offers.
Most ACH PayFacs offer instant onboarding, making it quick and easy for merchants to start accepting payments. On the other hand, applying for a traditional merchant account requires submitting extensive documentation. After this, it usually takes about 3-5 days to get approvals post the underwriting process.
This makes ACH PayFacs a desirable option for small businesses or start-ups.
Benefits for SaaS Companies and ISVs
For a SaaS company or an independent software vendor (ISV), ACH PayFacs offer a host of benefits besides allowing them to add a new revenue stream:
Streamline the payment process
ACH payments are convenient for both you and your customers. You can process one-time as well as recurring payments without any checkbooks or other cumbersome means. You no longer need to go to your bank, issue paper invoices to your customers, or maintain records. With ACH payments, money is transferred electronically saving you all the headaches of physical checks, record-keeping, and tallying.
Reduce processing fees and costs
ACH payments cost much less compared to credit card payments. Card transactions are, in fact, the most expensive mode of payment as fees are calculated based on a percentage of the transaction. Paper checks, on the other hand, are the least expensive but have hidden costs for merchants in terms of labor and time. That leaves ACH as the preferred mode of payment. While this may not seem like much, when your transaction fees start adding up, the cost reduction can be quite significant.
Enhance the customer payment experience
Your customers will no longer have to sign checks and mail them. With ACH payments, they can simply make a one-time payment or set recurring payments for your services. Consistent and branded payments enhance your reputation and offer a seamless checkout experience to your customers.
Provides compliance and security advantages
ACH payments are one of the most secure payment options your customers can have. Since it has no intermediaries, the risks of tampering and fraud are reduced manifold. Since ACH payments require an ACH form for authorization of payments, customers feel more secure using this payment method. This has been one of the biggest factors behind the success of ACH payments.
How ACH Payment Facilitators Operate
To understand how ACH PayFacs operate, imagine you have payment processors on one end of the spectrum and merchants on the other. A PayFac sits right in between the two and provides payment processing services through sub-merchant accounts.
ACH PayFacs may seem to be somewhat similar to independent sales organizations (ISO). The main difference, however, is that ISOs repackage and sell payment processing services on behalf of a different, possibly larger company. On the other hand, ACH PayFacs process payments directly.
How ACH PayFacs Integrate with SaaS or ISV Platforms
Using PayFacs to receive payments has become one of the most favored options for many eCommerce platforms. This is because of their unmatched ability to sync payments with these platforms. Online marketplaces like Amazon and eBay have used the PayFac model with astounding levels of success.
The great thing about an ACH PayFac solution like Stax Connect is that SaaS companies or ISVs can embed ACH payments in their software easily and white label the payment experience. All this without having to invest time and resources in partnering with an acquiring bank or building an elaborate payment infrastructure.
How to choose the Right ACH Payment Facilitator
With the countless options available, you might feel overwhelmed while choosing an ACH PayFac for your business. But remember, not all PayFacs are created equal. Keep the following tips in mind when shopping around.
- If you’re on a tight budget, partnering with an ACH PayFac that operates on a custom revenue-sharing model would be the best option.
- If you have just started a business, look for a PayFac that offers POS, exclusive ACH processing, and reporting features. This will help you save money by eliminating the need to look for different systems of payment processing.
- If you’re running a high-risk business, make sure you have a PayFac with strong security features and a fraud management system.
- If you’re only looking to process cards, get a PayFac that integrates with your website.
- In case you’re dealing in international transactions, you’ll need a PayFac that processes global currencies and multiple payment types.
Put simply, choose your PayFac with your business needs in mind. Whether it is security, financial constraints, know-your-customer (KYC) compliance, or processing international payments, ensure that the payment services of your ACH PayFac are in line with your needs.
Challenges and Considerations with ACH PayFacs
SaaS companies and ISVs operate in a highly competitive marketplace and a dynamic payment ecosystem. When it comes to payment processing, they face several challenges that can seriously affect their business by causing significant customer churn.
Customer experience
A poorly designed interface or lack of convenience can be quite off-putting for a user. Besides, recording customer payment information manually is time-consuming and in huge volumes, simply impossible! To offer great customer experiences and maintain KYC records, crafting a tailored interface with a robust CRM system is important.
Unsuccessful transactions
Failed transactions are a huge menace to SaaS companies and ISVs. These cause serious loss of time and money if they’re identified in the first place. Make sure you have a system that provides an overview of transactions, pricing plans, and failed transactions in real-time.
Cross-border payments
SaaS companies and ISVs are increasingly offering their services across the world. This provides great opportunities for businesses but at the same time poses challenges with regards to the acceptability of different currencies and modes of payment. Having a PayFac that takes care of local preferences but also offers global adaptability is important.
Security
Payment processing involves the exchange of sensitive customer data. Any breach can cause a big dent in your reputation. Make sure you have a secure and encrypted payment processing system in place.
Customer churn
The most common cause for customer churn is when card details have expired or the payment has failed. Acquiring new customers can be quite costly as compared to keeping existing ones. That’s why having a billing solution that avoids customer churn especially due to the above reasons is a must.
Integrations
As your business grows, you will want to explore new possibilities. This means you need to have the ability to integrate with new third-party applications. Find a payment solution that integrates seamlessly and enables you to benefit from new opportunities.
Overcoming the Challenges
The above challenges can be a serious roadblock to success for any SaaS or ISV company wanting to become an ACH PayFac. The key lies in having the right PayFac solution that can effectively avoid or mitigate the impact of these challenges. To learn how Stax Connect can help, contact the team for a consultation now!
Future Trends in ACH Payment Facilitation
A range of new technologies are about to shape ACH payment facilitation:
3D Secure 2.0
This provides an additional layer of security. It initiates data exchange among the merchant, card issuer, and customer to validate the payment. The technology aims at providing a smooth user experience and payment acceptance with better security.
Authorization rate optimization
Past data and Machine Learning technology enable sellers to increase their revenue by reducing the rate of payment declines. With a high authorization rate and zero declines, you can expect to add significantly higher levels of revenue.
Application Performance Management
This tool helps monitor and optimize the performance of your apps and hence boost the user experience. It covers areas like app metrics, code-level performance, network-based performance, etc.
Open banking
This is a system that uses APIs to provide third parties access to customers’ financial data. Customers usually grant access by checking a box online or signing terms of service. This will enable financial institutions to gauge customers’ financial position better and offer services accordingly.
AI and ML-based security
These technologies enable monitoring fraud in real-time and offer insights into fraudulent transactions. By processing large quantities of data, ML helps in risk management by optimizing operations and preventing fraud proactively. Likewise, AI algorithms can identify patterns that can indicate fraudulent activities.
While the above trends pave the way for a more beneficial payment experience for everyone, they will also demand some changes on your end. These include the following:
- A robust technological infrastructure
- Customer privacy and security
- Interoperability
- User awareness and adoption
- Quick and easy onboarding process
Final Words
It shouldn’t come as a surprise that ACH PayFacs provide some exceptional benefits to SaaS companies and software service providers. End-users can send and receive payments instantly while benefiting from low transaction fees, flexible and recurring billing, and great customer experiences.
For a SaaS company or ISV, partnering with an ACH payment facilitator solution like Stax Connect could be the easiest and quickest way to embark upon the PayFac business model. To learn more, contact us today.
FAQs about ACH Payment Facilitators
Q: What is an ACH payment facilitator?
An ACH (Automated Clearing House) payment facilitator is a service or platform that manages the processing of electronic payments, specifically ACH transactions. ACH transactions are a form of electronic fund transfer commonly used for direct deposit, payroll, and vendor payments.
Q: What does an ACH payment facilitator do?
An ACH payment facilitator typically handles several aspects of payment processing. This includes initiating ACH transactions on behalf of clients, managing the transfer of funds between banks, ensuring compliance with regulatory requirements, and providing security measures to protect the financial data involved in transactions.
Q: Are payment facilitators regulated?
Yes, payment facilitators are regulated. They must comply with regulations set by financial authorities such as the Federal Reserve and the National Automated Clearing House Association (NACHA) in the United States. These regulations include guidelines for transaction processing, data security standards, and customer authentication practices.
Q: What’s the difference between a payment facilitator and payment aggregator?
The difference between a payment facilitator and a payment aggregator lies mainly in their operational model. A payment facilitator directly manages client accounts and facilitates transactions on their behalf. In contrast, a payment aggregator bundles multiple small transactions from various unrelated clients into a single large transaction for processing. This aggregation model is often used for smaller businesses or individual merchants.
Q: What is an example of a payment facilitator?
An example of a payment facilitator is Stax Connect. Stax Connect offers a platform for businesses to manage their ACH transactions, including facilitating direct payments, providing transaction reporting tools, and ensuring compliance with relevant financial regulations.
